Section 2H - LTD

Question 1

Debenture bonds are not backed by ___

____ Bonds pay no interest unless the issuer is profitable

___ bonds pay interest from specific revenue sources

___ bonds mature after aterm or period of time

___ bonds mature in installments over a period of time

___ bonds are not recorded in the name of the owner and can be transferred easily

WARRANTS

____ ___ warrants allows the holder to purchase a given # of shares at a fixed price

____ warrants can be separated from bonds

____-___ warrants always trade together

Answer 1

Collateral

income

revenue

Term

Serial

Berarer (or coupon)

Stock purchase

detachable

non-detachable

Question 2

A TRD happens when the debtor is experiencing ____ difficulties AND grants a ____

Answer 2

financial

concession

Question 3

A troubled debt restructuring is normally accomplished by which of the following?

Issuance of an equity interest to the creditor by the debtor to satisfy fully or partially the debt

Modification of terms of the debt

All of the answer choices are methods to achieve a troubled debt restructuring.

Transfer from the debtor to the creditor of assets (e.g., real estate, receivables) to satisfy fully or partially the debt

Answer 3

All of the answer choices are methods to achieve a troubled debt restructuring.

• A troubled debt restructuring is normally accomplished by one or a combination of the following:
• Transfer from the debtor to the creditor of assets (e.g., real estate, receivables) to satisfy fully or partially the debt
• Issuance of an equity interest to the creditor by the debtor to satisfy fully or partially the debt
• Modification of terms of the debt, such as:
  
  • reduction in the interest rate for the remainder of the life of the debt
  • extension of maturity date(s) at an interest rate less than the current rate for new debt
  • reduction of the face amount or maturity amount of the debt
  • reduction of accrued interest

Question 4

A troubled debt restructuring is normally accomplished by one or a combination of the following:

• Transfer from the debtor to the creditor of ___(e.g., real estate, receivables) to satisfy fully or partially the debt
• Issuance of an ___interest to the creditor by the debtor to satisfy fully or partially the debt
• Modification of terms of the debt, such as:
  
  • ___in the interest rate for the remainder of the life of the debt
  • ___of maturity date(s) at an interest rate ___than the current rate for new debt
  • reduction of the ___amount or maturity amount of the debt
  • reduction of ___interest

Answer 4

assets

Equity Interest

reduction

Extension, less

Face Amount

Accrued

Question 5

On July 1, 2015, Eagle Corp. issued 600 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, 2015, and mature on April 1, 2021. Interest is payable semiannually on April 1 and October 1. What amount did Eagle receive from the bond issuance?

$579,000

$600,000

$609,000

$594,000

Answer 5

$609,000

Eagle received $609,000:

Sales price = 600 x $1,000 x 0.99 = $594,000
Accrued interest = 600 x $1,000 x 0.10 x (3/12) = 15,000

Total amount received $609,000

3/12 = April, May, & June.

Question 6

Amortization of Premium or Discount

Any discount or premium should be amortized by using the ____ method, which results in a constant rate of interest. Other methods, such as the ___ ___method (a constant amount per period) may be used if the results are not ___different.

Answer 6

interest

straight-line

materially

Question 7

In 20X1, May Corp. acquired land by paying $75,000 down and signing a note with a maturity value of $1,000,000. On the note’s due date, December 31, 20X6, May owed $40,000 of accrued interest and $1,000,000 principal on the note. May was in financial difficulty and was unable to make any payments. May and the bank agreed to amend the note as follows:

1. The $40,000 of interest due on December 31, 20X6, was forgiven.
2. The principal of the note was reduced from $1,000,000 to $950,000 and the maturity date extended one year to December 31, 20X7.
3. May would be required to make one interest payment totaling $30,000 on December 31, 20X7.

As a result of the troubled debt restructuring, May should report a gain, before taxes, in its 20X6 income statement of:

$60,000.

$40,000.

$90,000.

$50,000.

Answer 7

$60,000.

Gain on troubled debt restructuring for May Corp. in 20X6 is computed as follows:

Gain = Total due on debt - Required restructured payment
= Principal + Accrued interest - (Restructured principal + Required interest)

= ($1,000,000 + $40,000) - ($950,000 + $30,000)
= $1,040,000 - $980,000
= $60,000

Question 8

In a modification of terms, if the total scheduled cash payments are less than the carrying value of the debt, the TDR is recorded by the debtor as follows:

1. Reduce ___ value of debt to total scheduled cash payments.
2. Recognize ___ (equal to the difference between the carrying value of the debt and the total scheduled cash payments).
3. Recognize all ___payments—whether designated as principal or interest—as principal, reducing payable.

Answer 8

Carry Value

Gain

Future payments

Question 9

a

Answer 9

$864,884

The bonds will pay semiannually, and thus will pay $40,000 twice each year, computed as follows:

1. Face amount of $800,000 × 10% coupon × 6/12 (half-year) = $40,000

The yield of the bonds is 8% annually, but in half-year periods it is 4% a half-year. The present value of the bonds is thus the $40,000 multiplied by the present value of the ordinary annuity for 10 periods and 4%, plus the $800,000 par value of the bonds multiplied by the present value of $1 at 10 periods, 4%:

1. Issue price = ($40,000 × 8.11090) + ($800,000 × 0.67556) = $324,436 + $540,448 = $864,884

Question 10

Computation of Issue Price

When a bond is issued, the bond ___(indenture) specifies the amount and timing of payments the issuer is obligated to pay. The issuer will pay the following:

a. The ____or principal amount at the maturity date of the bonds
b. ___at specified intervals, usually semi-annually, during the life of the bond based on a stated percentage of the face amount

The interest rate stated in the bond contract is known variously as the stated, coupon, contract, or __rate.

Answer 10

contract

face

Interest

nominal

Question 11

On August 1, 20X1, Vann Corp.’s $500,000, 1-year, noninterest-bearing note due July 31, 20X2, was discounted at Homestead Bank at 10.8%. Vann uses the straight-line method of amortizing discount. What amount should Vann report for notes payable in its December 31, 20X1, balance sheet?

$500,000

$468,500

$446,000

$477,500

Answer 11

$468,500

The remainder is INTEREST

Question 12

If a premium on a bonds payable transaction is not amortized, what are the effects on interest expense and total stockholders’ equity?

Interest expense: understated; Total stockholders’ equity: overstated

Interest expense: overstated; Total stockholders’ equity: overstated

Interest expense: overstated; Total stockholders’ equity: understated

Interest expense: understated; Total stockholders’ equity: understated

Answer 12

Interest expense: overstated; Total stockholders’ equity: understated

When a bond is issued for a premium, then the issuer receives more than the face amount of the debt upon issuance.

Thus, the issuer will pay back (the face amount) less than the amount received. The additional receipts lower the interest expense over the course of the repayment, since the overall net repaid amount is less.

As the bonds are repaid, the premium is amortized and lowers the interest expense taken over the term of the bond. If the amortization is not taken, then the interest expense is overstated, and the net income understated. (Thus, retained earnings and stockholder’s equity are also too low.)

Question 13

When a bond is issued for a ___, then the issuer receives more than the face amount of the debt upon issuance.

When a bond is issued for a ___, then the issuer receives less than the face amount of the debt upon issuance.

As the bonds are repaid, the premium is amortized and __the interest expense taken over the term of the bond. If the amortization is not taken, then the interest expense is overstated, and the net income ___. (Thus, retained earnings and stockholder’s equity are also too low.)

Answer 13

premium

discount

lowers

understated

Question 14

The following information pertains to the transfer of real estate pursuant to a troubled debt restructuring by Knob Co. to Mene Corp. in full liquidation of Knob’s liability to Mene:

1. Carrying amount of liability liquidated $150,000
2. Carrying amount of real estate transf 100,000
3. Fair value of real estate transferred 90,000

What amount should Knob report as gain (loss) on transfer of real estate? (Do not include any gain or loss on the debt restructuring.)

$(10,000)

$0

$60,000

$50,000

Answer 14

$(10,000)

Question 15

____is a situation in which the creditor/lender, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The concession either stems from an agreement between the creditor and the debtor or is imposed by a law or court decree.

It means that the original terms of the debt are changed: (1) modifying terms to reduce or defer __payments, or (2) accepting cash, other assets, or an equity interest in the debtor in ___of the debt although the value received is less that the amount of the debt.

Answer 15

Troubled debt restructuring

cash

satisfaction

Question 16

On January 2, 20X1, Nast Co. issued 8% bonds with a face amount of $1,000,000 that mature on January 2, 20X7. The bonds were issued to yield 12%, resulting in a discount of $150,000. Nast incorrectly used the straight-line method instead of the effective interest method to amortize the discount. How is the carrying amount of the bonds affected by the error?

December 31, 20X1: Overstated; January 2, 20X7: No effect

December 31, 20X1: Overstated; January 2, 20X7: Understated

December 31, 20X1: Understated; January 2, 20X7: Overstated

December 31, 20X1: Understated; January 2, 20X7: No effect

Answer 16

December 31, 20X1: Overstated; January 2, 20X7: No effect

Question 17

A 15-year bond was issued in Year 1 at a discount. During Year 11, a 10-year bond was issued at face amount with the proceeds used to retire the 15-year bond at its face amount. The net effect of the Year 11 bond transactions was to increase long-term liabilities by the excess of the 10-year bond’s face amount over the 15-year bond’s:

carrying amount less the deferred loss on bond retirement.

face amount less the deferred loss on bond retirement.

face amount.

carrying amount.

Answer 17

carrying amount.

In order to solve this problem, give the 15-year bonds a face amount, say $100,000. If the bond was issued at a discount, then it was issued and was carried as a debt at a value below $100,000, say $90,000 (if the remaining unamortized discount was $10,000). If the 10-year bond was issued at its face amount, then it would be carried as a debt at its face amount.

If the 10-year bond was issued during Year 11, then the 15-year bond was still a long-term debt, and the new 10-year bond would also be a long-term debt. If the 10-year bond was issued at face and the proceeds paid off the face amount of the 15-year bond, then the 10-year bond would have needed to be at least the face amount of the 15-year bond (they would have the same face amount).

Thus, the new debt would be carried at $100,000, the old debt would be carried at below $100,000 (less the remaining unamortized discount), and the total long-term liabilities would be increased by the discount left, the amount the new 10-year debt carrying value is higher than the carrying value of the 15-year debt.

Question 18

The effective interest rate for a loan restructured in a troubled debt restructuring is based on:

the rate specified in the restructuring agreement.

any of the answer choices listed, if applied consistently to all restructured loans.

the current rate at the time of the restructuring.

the original contractual rate.

Answer 18

the original contractual rate.

The effective interest rate is based on the original contractual rate, rather than on the current interest rate or the rate specified in the restructuring agreement.

Note: Under some circumstances, a debtor’s interest could be a new rate, and thus “the rate specified in the restructuring agreement” could be the correct answer, but the best answer choice is “the original contractual rate.”

Question 19

Q: 300694

Answer 19

$1,620,000

The only noncurrent liability appearing on Mint Corp.’s December 31, 20X1, trial balance is the $1,620,000 noncurrent note payable.

“Costs in excess of billing on long term contracts,” is a current asset.
“Billings in excess of costs on long term contracts,” is a current liability.

Question 20

Which of the following financial instruments must be presented between the liabilities section and the equity section?

Mandatorily redeemable financial instruments

Obligations to repurchase the issuer’s equity shares by transferring assets

Certain obligations to issue a variable number of shares

None of the answer choices are correct; all of these financial instruments must be presented as liabilities.

Answer 20

None of the answer choices are correct; all of these financial instruments must be presented as liabilities.

FASB ASC 480-10-10 addresses the classification of the following three classes of freestanding financial instruments:

1. Mandatorily redeemable financial instruments
2. Obligations to repurchase the issuer’s equity shares by transferring assets
3. Certain obligations to issue a variable number of shares

These three classes of financial instruments must be presented in the balance sheet as liabilities. They may not be presented between the liabilities section and the equity section.

Question 21

FASB ASC 480-10-10 addresses the classification of the following three classes of freestanding financial instruments:

1. Mandatorily ___financial instruments
2. Obligations to ___the issuer’s equity shares by transferring assets
3. Certain obligations to issue a ___number of shares

These three classes of financial instruments must be presented in the balance sheet as ___. They may not be presented between the liabilities section and the equity section.

Answer 21

Redeemable

repurchase

variable

liabilities

Question 22

Perk, Inc., issued $500,000, 10% bonds to yield 8%. Bond issuance costs were $10,000. How should Perk calculate the net proceeds to be received from the issuance?

Discount the bonds at the market rate of interest.

Discount the bonds at the stated rate of interest and deduct bond issuance costs.

Discount the bonds at the stated rate of interest.

Discount the bonds at the market rate of interest and deduct bond issuance costs.

Answer 22

Discount the bonds at the market rate of interest and deduct bond issuance costs.

To determine the issue price for a bond, the cash flows from the bond should be discounted at the yield, or market, rate. The cash flows include the principal repayment and interest payments calculated at the stated rate. The net proceeds are the issue price less the cost to issue the bonds.

Question 23

Debt issuance costs related to a debt liability are presented in the balance sheet as a direct deduction from the ___amount of that debt liability, consistent with debt discounts.

If the coupon rate is greater than the market (or effective) rate, the bonds will sell at a ___(i.e., at an amount greater than the face amount of the bonds).

If the coupon rate is less than the market rate, the bonds will sell at a ___. The issue price is determined by discounting the payments (principal and interest) to the present using the effective or market rate of interest.

Answer 23

carrying

premium

discount

Question 24

Long-term debt often has covenants in the debt contract. Debt covenants are standards for the financial strength and performance of the borrower. These covenants are intended to protect the interest of the:

stockholders.

employees.

lending institution.

company’s management.

Answer 24

lending institution.

Long-term debt often has covenants in the debt contract. Debt covenants are standards for the financial strength and performance of the borrower. These covenants are intended to protect the interest of the lending institution. Common ratios used to define debt covenants are the current ratio and the interest coverage ratio. Other covenants could include such requirements as maintaining a specific debt/equity ratio, having enough cash flow to cover interest expense, or acquiring an unmodified audit opinion.

A covenant violation could result in the bonds becoming callable—giving the lending institution the right to receive the maturity value of the bonds prematurely or the right to convert the debt. Such debt would no longer be classified as long term, but would be considered a short-term liability.

Question 25

Answer 25

E2 + D3

Carrying amount is the cost less unamortized discount. Unamortized discount is reduced each year due to current discount amortization. Consequently, the formula should reflect the most recent carrying value plus any discount amortization.

Question 26

On January 1, 20X2, Oak Co. issued 400 of its 8%, $1,000 bonds at 97 plus accrued interest. The bonds are dated October 1, 20X1, and mature on October 1, 20X6. Interest is payable semiannually on April 1 and October 1. Accrued interest for the period October 1, 20X1, to January 1, 20X2, amounted to $8,000. On January 1, 20X2, what amount should Oak report as bonds payable, net of discount?

$380,300

$392,000

$388,300

$388,000

Answer 26

$388,000

$8,000 would be interest payable on the bonds, not bonds payable. When you pay the interest, you don’t reduce the bonds payable obligation.

Question 27

301756

Answer 27

$90,064

Question 28

On January 1, a company issued a $50,000 face value, 8% 5-year bond for $46,139 that will yield 10%. Interest is payable on June 30 and December 31. What is the bond carrying amount on December 31 of the current year?

$47,106

$46,139

$46,446

$46,768

Answer 28

$46,768

Question 29

For a troubled debt restructuring involving only a modification of terms, which of the following items specified by the new terms would be compared to the carrying amount of the debt to determine if the debtor should report a gain on restructuring?

The present value of the debt at the original interest rate

The amount of future cash payments designated as principal repayments

The total future cash payments

The present value of the debt at the modified interest rate

Answer 29

The total future cash payments

This question relates to the debtor’s gain on troubled debt restructuring. FASB ASC 310-40-40-1 has changed the treatment of creditor’s losses on a restructuring to include the use of present values. Debtor’s gains, however, continue to follow FASB ASC 470-60-35-6.

Debtor’s gains are calculated based on undiscounted amounts.

The total future cash payments, including interest, are used to compute the gain on troubled debt restructuring.

Question 30

A company issues $1,500,000 of par bonds at 98 on January 1, year 1, with a maturity date of December 31, year 30. Bond issue costs are $90,000, and the stated interest rate of the bonds is 6%. Interest is paid semiannually on January 1 and July 1. Ten years after the issue date, the entire issue was called at 102 and canceled. The company uses the straight-line method of amortization for bond discounts and issue costs, and the result of this method is not materially different from the effective interest method. The company should classify what amount as the loss on extinguishment of debt at the time the bonds are called?

$50,000

$90,000

$30,000

$110,000

Answer 30

$110,000

Question 31

On June 2, 20X1, Tory, Inc., issued $500,000 of 10%, 15-year bonds at par. Interest is payable semi-annually on June 1 and December 1. Bond issue costs were $6,000. On June 2, 20X6, Tory retired half of the bonds at 98. What is the net amount that Tory should use in computing the gain or loss on retirement of debt?

$249,000

$248,000

$248,500

$247,000

Answer 31

$248,000

1. Bond issue cost related to bonds retired = 1/2 of $6,000 = $3,000
2. Bond issue cost amortized by 06/02/X6 = 5/15 of $3,000 = $1,000

Face amount of bonds retired (1/2 of $500,000) = $250,000
Less unamort bond iss. costs ($3,000 - $1,000) = 2,000
Bond carrying value prior to retirement $248,000

Question 32

Webb Co. has outstanding a 7%, 10-year $100,000 face-value bond. The bond was originally sold to yield 6% annual interest. Webb uses the effective interest rate method to amortize bond premium. On June 30, Year 2, the carrying amount of the outstanding bond was $105,000. What amount of unamor­tized premium on bond should Webb report in its June 30, Year 3, balance sheet?

$3,950

$1,050

$4,500

$4,300

Answer 32

$4,300

The interest paid for the year from June 30, Year 2. to June 30, Year 3. is based on the face amount ($100,000) multiplied by the stated 7% payment rate:

• $100,000 × 0.07 = $7,000

The interest expense using the interest method is based on the carrying amount of the debt multiplied by the yield of the debt:

• $105,000 × 0.06 = $6,300

The premium amortized from June 30, Year 2, to June 30, Year 3, is the difference of these two amounts:

• $7,000 – $6,300 = $700

Thus, the premium of $5,000 on June 30, Year 2, ($105,000 – $100,000, carrying amount less face amount) is lowered by the $700 premium amortization down to $4,300:

• $5,000 – $700 = $4,300

Question 33

Wilk Co. reported the following liabilities at December 31, 20X1:

1. Accounts payable-trade $ 750,000
2. Short-term borrowings 400,000
3. Bank loan (current portion $100,000) 3,500,000
4. Other bank loan, matures June 30, 20X2 1,000,000

The bank loan of $3,500,000 was in violation of the loan agreement. The creditor had not waived the rights for the loan. What amount should Wilk report as current liabilities at December 31, 20X1?

$1,250,000

$2,150,000

$5,650,000

$2,250,000

Answer 33

$5,650,000

Current liabilities represent obligations whose liquidation is expected to require the use of current assets or the creation of other current liabilities.

Current liabilities also include long-term obligations that are or will be callable by the creditor because the debtor has violated a covenant in the debt agreement. The “other bank loan” matures in 6 months from the balance sheet date and is a current liability.

Question 34

A financial instrument that embodies an unconditional obligation that the issuer must or may settle by issuing a variable number of its equity shares must be classified as a liability if, at inception, the monetary value of the obligation is based solely or predominantly on which of the following:?

Any one of the conditions listed

Variations inversely related to changes in the fair value of the issuer’s equity shares

Variations in something other than the fair value of the issuer’s equity shares

A fixed monetary amount known at inception

Answer 34

Any one of the conditions listed

A financial instrument that embodies an unconditional obligation, or one other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares must be classified as a liability if, at inception, the monetary value of the obligation is based solely or predominantly on any one of the following:

1. A fixed monetary amount known at inception (for example, a payable settleable with a variable number of the issuer’s equity shares)
2. Variations in something other than the fair value of the issuer’s equity shares (for example, a financial instrument indexed to the Standard and Poor’s 500 and settleable with a variable number of the issuer’s equity shares)
3. Variations inversely related to changes in the fair value of the issuer’s equity shares (for example, a written put option that could be net share settled)

Question 35

A financial instrument that embodies an unconditional obligation, or one other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares must be classified as a liability if, at inception, the monetary value of the obligation is based solely or predominantly on any one of the following:

1. A fixed monetary amount known at inception
2. Variations in something other than the ___value of the issuer’s equity___
3. Variations ___related to changes in the ____of the issuer’s equity shares

Answer 35

fixed monetary amount

FV, shares

Inversely, FV

Question 36

On January 1, Year 1, Fox Corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000. These bonds were to mature on January 1, Year 11, but were callable at 101 any time after December 31, Year 4. Interest was payable semiannually on July 1 and January 1. On July 1, Year 6, Fox called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, Fox’s gain or loss in Year 6 on this early extinguishment of debt was:

$10,000 loss.

$30,000 gain.

$8,000 gain.

$12,000 gain.

Answer 36

$8,000 gain.

The bonds were issued at a premium of $40,000 ($1,040,000 – $1,000,000). The premium is amortized using straight-line, over the term of the bonds, $40,000 ÷ 10 years (from January of Year 1 to January of Year 11), or $4,000 premium amortized each year.

The bonds were called on July 1, Year 6, for $1,010,000, the call price (1,000 bonds × $1,000 per bond × 1.01 call percentage). By July 1, Year 6, 5-1/2 years have gone by from the issuance on January 1, Year 1. Thus, the remaining unamortized premium on the bonds is the initial total of $40,000 – (5.5 years × $4,000), or $18,000 ($40,000 – $22,000).

The call price of the bonds was $1,010,000 and the carrying value of the bonds was $1,018,000 ($1,000,000 + $18,000), so the debt was paid for less than the carrying amount, and a gain of the $8,000 difference is recognized ($1,018,000 – $1,010,000).

Question 37

The FASB has concluded that all ___of debt are fundamentally alike and should, therefore, be accounted for alike. The conversion of convertible debt by the holder of the debt is not deemed to be an extinguishment of debt, although it can be treated as such.

Debt is considered extinguished if either of the following conditions is met:

1. The debtor pays the creditor and is relieved of its obligation for the liability.
2. The debtor is ____from being the primary obligor under the liability, either judicially or by the creditor.

Any difference between the reacquisition price and the net carrying amount of the extinguished debt should be included in __in the period of extinguishment

The net ___amount is the face amount of the debt plus or minus any unamortized discount, bond issue costs, or premium.

Answer 37

extinguishments

Relieved

legally released

income

carrying

Question 38

On December 1, 20X5, Honeyberry Corporation issued 200 of its 6%, $1,000 bonds at 102 plus accrued interest. The bonds are dated October 1, 20X5, and mature on October 1, 20X9. Interest is payable semiannually on April 1 and October 1. On December 1, 20X5, what amount should Honeyberry report as bonds payable?

$200,000

$204,000

$202,000

$206,000

Answer 38

$204,000

302148

Question 39

On January 2, Vole Co. issued bonds with a face value of $480,000 at a discount to yield 10%. The bonds pay interest semiannually. On June 30, Vole paid bond interest of $14,400. After Vole recorded amortization of the bond discount of $3,600, the bonds had a carrying amount of $363,600. What amount did Vole receive upon issuing the bonds?

$367,200

$480,000

$476,400

$360,000

Answer 39

$360,000

When bonds are issued at a discount, the carrying value of the bonds is less than the face value. The initial carrying value is the issue price (proceeds received upon issuance). When you pay interest, you amortize the discount, making it smaller.

As discount is amortized, the carrying value of the bond comes closer to face value. After the initial interest payment, therefore, the amortization of the bond discount on the first payment date was from the issue price to the present carrying amount.

Subtract the discount amortization just added to get the present book value, the $3,600, to get the original book value, the issue price. So, the bond carrying cost after the first payment less the amortization of the first payment is the issue price: $363,600 - $3,600 = $360,000.

Question 40

The discount resulting from the determination of a note payable’s present value should be reported on the balance sheet as:

an addition to the face amount of the note.

a deferred credit separate from the note.

a direct reduction from the face amount of the note.

a deferred charge separate from the note.

Answer 40

a direct reduction from the face amount of the note.

Question 41

Johnson Corp. issued bonds on January 1, 20X1. The 6% bonds have a face value of $80,000, and were issued for $87,186, reflecting a yield rate of 4%. The interest payments dates are June 30 and December 31 and the bonds mature in 5 years. Johnson uses the effective interest method to amortize discounts and premiums on the bonds it issues. How much will Johnson debit for interest expense on June 30, 20X1, rounded?

$1,731

$656

$2,400

$1,744

Answer 41

$1,744

Question 42

Which of the following financial instruments issued by a public company should be reported on the issuer’s books as a liability on the date of issuance?

Preferred stock that is convertible to common stock five years from the issue date

Cumulative preferred stock

Common stock that contains an unconditional redemption feature

Common stock that is issued at a 5% discount as part of an employee share purchase plan

Answer 42

Common stock that contains an unconditional redemption feature

An unconditional redemption feature on stock must be reported as a liability. Cumulative or convertible preferred stock does not create a liability. Neither does common stock issued at a discount.

Question 43

301525

Answer 43

Serial bonds, $475,000; Debenture bonds, $400,000

Serial bonds mature in installments (only part of the total principal is paid back each year, so only some of the total bonds are paid off each year) and thus are described as maturing annually.

Thus, the serial bonds are the 9.375% bonds and the 10% bonds for a total of $475,000 ($275,000 + $200,000).

Debenture bonds are unsecured debt, and so these are the 9.375% and the 11.5% bonds for a total of $400,000 ($275,000 + $125,000).

Question 44

Serial Bonds

Some bond issues provide for the payment of the principal in periodic installments. These bonds are known as ____. The bond issue is, in essence, a series of separate bond issues that mature at different dates.

Answer 44

serial bonds

Question 45

On March 1, 20X0, Fine Co. borrowed $10,000 and signed a 2-year note bearing interest at 12% per annum compounded annually. Interest is payable in full at maturity on February 28, 20X2. What amount should Fine report as a liability for accrued interest on December 31, 20X1?

$2,320

$1,200

$1,000

$0

Answer 45

$2,320

Accrued interest on December 31, 20X1:

For 20X0: $10,000 x .12 x (10/12) = $1,000
For 20X1: ($10,000 + $1,000) x .12 = 1,320
Total $2,320

Question 46

A note payable was issued in payment for services received. The services had a fair value less than the face amount of the note payable. The note payable has no stated interest rate. How should the note payable be presented in the statement of financial position?

At the face amount minus a discount calculated at the imputed interest rate

At the face amount with a separate deferred asset for the discount calculated at the imputed interest rate

At the face amount with a separate deferred credit for the discount calculated at the imputed interest rate

At the face amount

Answer 46

At the face amount minus a discount calculated at the imputed interest rate

When a note payable is exchanged for prop­erty, goods, or services, and the interest rate is not stated or is unreasonable, record the note at the fair value of the property, goods, or services exchanged OR at the amount that approximates the market value of the note, whichever is more clearly determinable. In the absence of said information, the note is recorded at its present value by discounting all future payments on the note using an imputed interest rate. The imputed interest rate is determined by considering the debtor’s credit standing, prevailing rates for similar debt, and rates at which the debtor can obtain funds.

The note payable should be presented in the statement of financial position at its face amount minus the discount calculated at the imputed interest rate.

Question 47

Ace Corp. entered into a troubled debt restructuring (TDR) agreement with National Bank. National agreed to accept land with a carrying amount of $75,000 and a fair value of $100,000 in payment and cancellation of a note (from Ace) with a carrying amount of $150,000. Disregarding income taxes, what amount should Ace report as a gain from the restructuring in its income statement?

$75,000

$50,000

$0

$25,000

Answer 47

$50,000

In a transfer of assets to satisfy debt in a TDR, the debtor:

1. recognizes a gain or loss on the transfer of assets (equal to the difference between the fair value of $100,000 and recorded value of $75,000 of the asset transferred), or $25,000, and
2. recognizes a gain on the restructuring of a debt (equal to the difference between the $100,000 fair value of the asset and the $150,000 carrying value of the debt), or $50,000.

Even though a total gain of $75,000 is recognized on the income statement, the portion attributable to the restructuring is $50,000.

Question 48

In a transfer of assets to satisfy debt in a TDR, the debtor:

1. recognizes a gain or loss on the ___of assets
2. recognizes a gain on the ___of a debt

Answer 48

Transfer

Restructure

Question 49

When debt is issued at a discount, interest expense over the term of debt equals the cash interest paid:

minus discount minus par value.

plus discount.

minus discount.

plus discount plus par value.

Answer 49

plus discount.

Issuance of debt at a discount occurs when the effective interest rate is higher than the stated interest rate.

The contractual interest is not sufficient and is supplemented by selling the bonds at less than face value.

Therefore, the discount is amortized over the term of the bonds by increasing interest expense above cash interest.

Question 50

ohnson Corp. issued bonds on January 1, 20X1. The 6% bonds have a face value of $80,000, and were issued for $87,186, reflecting a yield rate of 4%. The interest payments dates are June 30 and December 31 and the bonds mature in 5 years. Johnson uses the effective interest method to amortize discounts and premiums on the bonds it issues. How much interest expense will Johnson report in its income statement related to these bonds for the year ended December 31, 20X1?

$3,475

$1,731

$2,400

$1,744

Answer 50

$3,475

302147

Question 51

Answer 51

$281,159

This question is about the computation of the issue price for a bond. The bonds will pay semiannually, and thus will pay $7,500 twice each year, computed as follows:

• Face amount of $300,000 × 5% coupon × 6/12 (half-year) = $7,500

The bond is priced to yield the market rate, 6% annually or 3% semiannually. The present value of the bonds is thus the $7,500 multiplied by the present value of the ordinary annuity for 16 periods and 3%, plus the $300,000 face value of the bonds multiplied by the present value of $1 at 16 periods, 3%:

• Issue price = ($7,500 × 12.5611) + ($300,000 × 0.62317) = $94,208 + $186,951 = $281,159

Question 52

On November 1 of the current year, Mason Corp. issued $800,000 of its 10-year, 8% term bonds dated October 1 of the current year. The bonds were sold to yield 10%, with total proceeds of $700,000 plus accrued interest. Interest is paid every April 1 and October 1. What amount should Mason report for interest payable in its December 31 current-year balance sheet?

$17,500

$10,667

$16,000

$11,667

Answer 52

$16,000

Even though the bonds have only been outstanding for two months (November and December) by the end of the year, nevertheless, the bonds pay interest on October and, in this case, owe the interest to be paid starting to accrue from October (the interest payment date).

Thus, the interest payable up until the end of December for the year is based on the face amount ($800,000), the stated interest rate (8%), and the time from the October 1 payment date until the end of December. Thus, the interest payable at the end of the year is $16,000:

$800,000 × 0.08 × 3/12 = $16,000

Question 53

NuCorp. agreed to give Rand Co. a machine in full settlement of a note payable to Rand. The machine’s original cost was $140,000. The note’s face amount was $110,000. On the date of the agreement:

1. the note’s carrying amount was $105,000, and its present value was $96,000.
2. the machine’s carrying amount was $109,000, and its fair value was $96,000.

Assuming that this trade was made as part of troubled debt restructuring, what amount of gains/losses should NuCorp. recognize, and how should these be classified in its income statement?

Other gain/loss: $0

Other gain/loss: $(13,000)

Other gain/loss: $4,000

Other gain/loss: $(4,000)

Answer 53

Other gain/loss: $(4,000)

The total gain/loss in this case is the difference between the carrying value of the debt, $105,000, and the carrying value of the machine, $109,000 and its fair value of $96,000 conceivably could be deemed to be an impairment loss.

However, we do not have enough information to know that this $13,000 part of the loss qualifies as an impairment loss.

Nevertheless, even if it did, it would be included in income from continuing operations. The best answer is that the $4,000 net loss should be recognized as an ordinary loss to be included in income from continuing operations.

Question 54

Somar Co. has regularly issued bonds and frequently retires them early. On March 1, 20X1, Somar Co. issued 20-year bonds at a discount. By September 1, 20X6, the bonds were quoted at 106 when Somar exercised its right to retire the bonds at 105. How should Somar report the bond retirement on its 20X6 income statement?

A gain in continuing operations

A loss in continuing operations

A gain in other revenues and gains

A loss in other expenses and losses

Answer 54

A loss in continuing operations

The bonds were sold at a discount, so their carrying value (bond face amount less unamortized discount) was less than 100. When Somar Co. retired the bonds at 105, a loss was incurred.

Question 55

A company issued bonds with detachable common stock warrants. The issue price exceeded the sum of the warrants’ fair value and face value of the bonds. The fair value of the bonds cannot be determined. What value, if any, should be assigned to the warrants?

The proportion of the proceeds that the warrants’ fair value bears to the face value of the bonds

The fair value of the warrants

No amount, because the total proceeds should be assigned to the bonds

The excess of the proceeds over the face value of the bonds

Answer 55

The fair value of the warrants

Warrants give the holder the right (but not the obligation) to purchase a set number of shares of stock from the issuing company for a fixed price on or before the warrants’ expiration date.

Because a warrant holder can receive issuer shares, the issuer usually classifies warrants as equity instruments and carries their value in the warrants paid-in capital account in the stockholders’ equity section of the balance sheet.

When detachable warrants are issued, the total proceeds must be allocated between the bond and the warrants based on their freestanding relative fair values on the issuance date.

Since the fair value of the bonds cannot be determined, the warrants would be assigned their fair value with the remainder amount being assigned to the bonds.

Question 56

What type of bonds in a particular bond issuance will not all mature on the same date?

Serial bonds

Sinking fund bonds

Term bonds

Debenture bonds

Answer 56

Serial bonds..

Serial bonds are a set of related bonds issued at the same time but which mature at intervals over time.

A debenture is an unsecured promissory note (bond) to pay a specified amount on a specified date. Term bonds are bonds that are scheduled to be outstanding for a fixed period of time, or term. A sinking fund is money regularly set aside for a specific purpose, usually to redeem outstanding bonds or preferred stock or to replace capital assets.

Question 57

On April 1, 20X2, Hill Corp. issued 200 of its $1,000 face value bonds at 101 plus accrued interest. The bonds were dated November 1, 20X1, and bear interest at an annual rate of 9% payable semiannually on November 1 and May 1. What amount did Hill receive from the bond issuance?

$200,000

$209,500

$194,500

$202,000

Answer 57

$209,500

The bonds themselves were sold for 101% of face value, but they were issued between interest payment dates, and thus five months of accrued interest was also received, and will be paid back (along with another month’s interest) at the scheduled interest payment date.

Sales price of bonds = 1.01 x 200 x $1,000 = $202,000
Accrued interest = (5/12) (.09 x 200 x $1,000) = 7,500
Total received from bond issuance $209,500

Question 58

Anchor Co. is experiencing financial difficulties. Anchor negotiated a settlement of $100,000 in debt owed to Bowden, Inc. in exchange for Anchor’s gross receivables of $100,000. The receivables have an allowance for uncollectible accounts of $25,000. The impact of this transaction on Anchor’s net income is a $25,000:

gain on restructuring of payables.

loss on restructuring of payables.

decrease in bad debt expense.

increase in bad debt expense.

Answer 58

gain on restructuring of payables.

In a transfer of assets to satisfy debt in a troubled debt restructuring, the debtor recognizes a gain or loss on the transfer of assets equal to the difference between the fair and recorded values of the asset transferred.

Anchor transferred assets with a fair value of $100,000 and a recorded value of $75,000 (i.e., $100,000 net the $25,000 allowance), and thus Anchor should recognize a gain of $25,000 on the restructuring of payables.

Question 59

The following information pertains to the transfer of real estate pursuant to a troubled debt restructuring by Knob Co. to Mene Corp. in full liquidation of Knob’s liability to Mene.

1. Carrying amount of liability liquidated $150,000
2. Carrying amount of real estate transferred 100,000
3. Fair value of real estate transferred 90,000

At what amount should Mene record the real estate transferred?

$150,000

$90,000

$100,000

$60,000

Answer 59

$90,000

When a creditor receives property as partial payment in settlement of a debt, the creditor should recognize the property received at the fair value of the property received. Mene is the creditor and the fair value of the real estate is $90,000.

Question 60

Chestnut Limited issued bonds with a face value of $280,000. This issuance took place on May 20, Year 1. The bonds are dated March 20, Year 1, and mature on March 20, Year 11. The bonds have a stated interest rate of 6% and were issued at 1.02 plus accrued interest. Interest is payable semiannually on March 20 and September 20. What amount did Chestnut receive from the bond issuance?

$285,600

$282,800

$280,000

$288,400

Answer 60

$288,400

When bonds are issued between the date they are dated and the first interest payment date, the interest related to the time period between the date the bonds are dated and the issue date is paid by the purchaser of the bonds to the issuer. This is because the issuer will pay a full interest payment on the first interest payment date. By having the purchaser of the bonds pay the accrued interest to the issuer, the amount received by the purchaser on the first interest payment, combined with the amount paid by the purchaser, results in a net payment of the interest accrued from the date the bonds are issued until the first interest payment date.

Sales price = $280,000 x 1.02 = $285,600
Accrued interest = $280,000 x 0.06 x (2/12) = 2,800
Total amount received $288,400

Question 61

A company issues bonds at 98, with a maturity value of $50,000. The entry the company uses to record the original issue should include which of the following?

A debit to bond discount of $1,000

A credit to bond premium of $1,000

A debit to bonds payable of $50,000

A credit to bonds payable of $49,000

Answer 61

A debit to bond discount of $1,000

Question 62

Wood Corp., a debtor-in-possession under Chapter 11 of the Federal Bankruptcy Code, granted an equity interest to a creditor in full settlement of a $28,000 debt owed to the creditor. At the date of this transaction, the equity interest had a fair value of $25,000. What amount should Wood recognize as a gain on restructuring of debt?

$25,000

$3,000

$28,000

$0

Answer 62

$3,000

FASB ASC 470-60-35-4 stipulates: “A debtor that issues or otherwise grants an equity interest to a creditor to settle fully a payable shall account for the equity interest at its fair value. The difference between the fair value of the equity interest granted and the carrying amount of the payable settled shall be recognized as a gain on restructuring of payables.”

Wood should recognize a gain on restructuring of debt of $3,000 ($28,000 − $25,000).

Question 63

Aaron Co. issued shares of stock that are required to be redeemed upon the death of the holder for a proportionate share of the book value of Aaron. Which of the following statements is true?

The stock is mandatorily redeemable financial instrument.

The stock is classified as a liability.

Disclosure is required.

All of the answer choices are true.

Answer 63

All of the answer choices are true.

.FASB ASC 480-10-25-4 requires mandatorily redeemable stock to be classified as a liability, with proper disclosure. Since death is certain to occur at some point, a liability is shown. A mandatorily redeemable financial instrument shall be classified as a liability unless the redemption is required to occur only upon the liquidation or termination of the reporting entity.

Question 64

During the year, Lake Co. issued 3,000 of its 9%, $1,000 face value bonds at 101½. In connection with the sale of these bonds, Lake paid the following expenses:

1. Promotion costs $ 20,000
2. Engraving and printing 25,000
3. Underwriters’ commissions 200,000

What amount should Lake record as bond issue costs?

$245,000

$0

$225,000

$220,000

Answer 64

$245,000

Be aware that ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts; the recognition and measurement guidance for debt issuance costs were not affected by the amendments. Amortization of debt issuance costs also shall be reported as interest expense; issue costs will no longer be reported in the balance sheet as deferred charges.

The items listed (promotion costs, engraving and printing, and underwriters’ commissions) would all qualify as bond issuance costs:

$20,000 + $25,000 + $200,000 = $245,000

Question 65

Andro Co. has a $10 million note payable that is due three months after year-end. The note payable was refinanced when long-term bonds were issued one month after year-end for $11 million. The December 31 financial statements were issued two months after year-end. How should Andro classify and disclose the note?

Classification of liability: Current
Note disclosure required: Yes

Classification of liability: Noncurrent
Note disclosure required: No

Classification of liability: Current
Note disclosure required: No

Classification of liability: Noncurrent
Note disclosure required: Yes

Answer 65

Classification of liability: Noncurrent…..Note disclosure required: Yes

To classify a liability as long term, the enterprise must have the intent and ability to refinance the obligation.

Refinancing a short-term obligation on a long-term basis means renewing, extending, or replacing it with short-term obligations for an uninterrupted period extending beyond one year from the date of an enterprise’s balance sheet.

The ability to consummate the refinancing may be demonstrated by actual issuance of a long-term obligation after the balance sheet date, but before the balance sheet is issued.

The amount of the short-term obligation to be excluded from current liabilities is the amount of the obligation that is able to be refinanced on a long-term basis. The refinanced note must be disclosed.

Question 66

On October 1, Year 1, Gold Co. borrowed $900,000 to be repaid in three equal, annual installments. The note payable bears interest at 5% annually. Gold paid the first installment of $300,000 plus interest on September 30, Year 2. What amount should Gold report as a current liability on December 31, Year 2?

$300,000

$303,750

$330,000

$307,500

Answer 66

$307,500

Current liabilities will include any installments of principal due within the next 12 months, plus the interest expense accrued (but not paid) until the end of the year. The second installment of $300,000 is due on September 30, Year 3, so it is a current liability as of December 31, Year 2. The first installment was paid on September 30, Year 2, so only 2/3rds of the $900,000 is still outstanding as principal on December 31, Year 2; only $600,000 is left.

The last payment on September 30, Year 2, included all interest to date; thus, we only need to accrue interest from September 30, Year 2, until December 31, Year 2, which is a total of $7,500 based on principal of $600,000 × 0.05 × 3/12 (last 3 months of the year). So, the total current liability as of December 31, Year 2, is $300,000 + $7,500, for a total of $307,500.

Question 67

House Publishers offered a contest in which the winner would receive $1,000,000, payable over 20 years. On December 31, 20X1, House announced the winner of the contest and signed a note payable to the winner for $1,000,000, payable in $50,000 installments every January 2. Also on December 31, 20X1, House purchased an annuity for $418,250 to provide the $950,000 prize monies remaining after the first $50,000 installment, which was paid on January 2, 20X2.

In its December 31, 20X1, balance sheet, what amount should House report as note payable to contest winner, net of current portion?

$950,000

$418,250

$900,000

$368,250

Answer 67

$418,250

The noncurrent portion of the note payable to contest winner should be reported on the balance sheet net of discount. This means that the present value of the 19 future payments of $50,000 is the correct amount to be disclosed. This amount is the $418,250 cost of the annuity.

Question 68

A company is obligated to pay a specified amount to a supplier even if it does not take delivery of the contracted goods. This type of commitment is:

not reported on the balance sheet but disclosed in the notes to the financial statements.

recorded and reported on the balance sheet at the present value of the future required payments.

not reported or disclosed in the financial statements.

recorded and reported on the balance sheet at the fair value of the goods to be received

Answer 68

not reported on the balance sheet but disclosed in the notes to the financial statements.

When a company is obligated to pay a specified amount to a supplier even if it does not take delivery of the contracted goods, it has an unconditional purchase commitment. Such an obligation is not reported on the balance sheet but is disclosed in the notes to the financial statements at the present value of the future required payments.

Question 69

When a company is obligated to pay a specified amount to a supplier even if it does not take delivery of the contracted goods, it has an unconditional ___commitment.

Such an obligation is not reported on the balance sheet but is disclosed in the notes to the financial statements at the present value of the future required payments. t/f

Answer 69

purchase

true

Question 70

On June 30, 20X1, after paying the semiannual interest due and recording amortization of bond discount, Hake redeemed its 15-year, 8% $1,000,000 par bonds at 102. Hake has a policy to redeem bonds when it is advantageous to do so. The bonds, which had a carrying amount of $940,000 on January 1, 20X1, had originally been issued to yield 10%. Hake used the effective interest method of amortization and paid interest and recorded amortization on June 30. Compute the amount of gain or loss on the redemption of the bonds.

Hake will record a gain of $60,000 on the redemption of the bonds.

Hake will record a loss of $73,000 on the redemption of the bonds.

Hake will record a loss of $53,000 on the redemption of the bonds.

Hake will record a loss of $80,000 on the redemption of the bonds.

Answer 70

Hake will record a loss of $73,000 on the redemption of the bonds…….300475

Question 71

The market price of a bond issued at a discount is equal to:

the present value of its principal amount plus the present value of all future interest payments, using the market (effective) interest rate.

the present value of its principal amount minus the present value of all future interest payments, using the coupon (stated) interest rate.

the present value of its principal amount minus the present value of all future interest payments, using the market (effective) interest rate.

the present value of its principal amount plus the present value of all future interest payments, using the coupon (stated) interest rate.

Answer 71

the present value of its principal amount plus the present value of all future interest payments, using the market (effective) interest rate.

FASB ASC 835-30-25-10 requires all long-term receivables and payables to be recorded at present value. Additionally, the present value of all the cash flows (principal and interest) at the beginning of any bond arrangement represents the amount of cash the issuer will receive from the purchaser (i.e., the market price of the bond).

The stated rate of interest is used to determine the amount and timing of the cash flows for interest. The market rate is the true rate of interest in the arrangement and is used to determine the present value of all the cash flows.

Question 72

A mandatorily redeemable financial instrument, such as mandatorily redeemable preferred stock, must be classified as a liability unless the redemption is required to occur only:

at the redemption date.

if the current market rate for interest exceeds the stated dividend rate.

upon the liquidation or termination of the reporting entity.

if the stated dividend rate exceeds current market rate for interest.

Answer 72

upon the liquidation or termination of the reporting entity.

A mandatorily redeemable financial instrument, such as mandatorily redeemable preferred stock, must be classified as a liability unless the redemption is required to occur only upon the liquidation or termination of the reporting entity.

Question 73

When the effective interest method of amortization is used for bonds issued at a premium, the amount of interest payable for an interest period is calculated by multiplying the:

face value of the bonds at the beginning of the period by the contractual interest rate.

carrying value of the bonds at the beginning of the period by the contractual interest rate.

carrying value of the bonds at the beginning of the period by the effective interest rates.

face value of the bonds at the beginning of the period by the effective interest rates.

Answer 73

face value of the bonds at the beginning of the period by the contractual interest rate.

Whether the bond is issued at a premium or discount or at par, the interest payable (in cash) is calculated the same way: face value (principal) of the bonds times coupon (contractual interest rate). The same is true for the straight-line method as well.

Interest expense for the period is the carrying value times the effective rate. Multiplying the face value of the bonds at the beginning of the period by the effective interest rates, or multiplying the carrying value of the bonds at the beginning of the period by the contractual interest rate have no accounting use per se.

Question 74

A company finances the purchase of equipment with a $500,000 5-year note payable. The note has an interest rate of 12% and a monthly payment of $11,122. After two payments have been made, what amount should the company report as the note payable balance in its December 31 balance sheet?

$490,061

$487,756

$477,756

$487,695

Answer 74

$487,695

Question 75

300621

Answer 75

Question 76

A bond issued on June 1, year 1, has interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31, year 1, is for a period of:

six months.

four months.

three months.

seven months

Answer 76

Interest expense begins to accrue from the date the bonds are issued. There are seven months of interest, from June 1 through December 31.

Question 77

On January 2, 20X1, West Co. issued 9% bonds in the amount of $500,000, which mature on January 2, 20X8. The bonds were issued for $475,658 to yield 10%. Interest is payable annually on December 31. West uses the interest method of amortizing bond discount. In its June 30, 20X1, balance sheet, what amount should West report as bonds payable?

$478,224

$475,658

$474,375

$476,941

Answer 77

$476,941

300466

Question 78

On June 1 of the current year, Cross Corp. issued $300,000 of 8% bonds payable at par with interest payment dates of April 1 and October 1. In its income statement for the current year ended December 31, what amount of interest expense should Cross report?

$6,000

$12,000

$14,000

$8,000

Answer 78

$14,000

The interest is calculated as:

Principal ($300,000) × Interest Rate (8%) × Time (7 months ÷ 12 months) = $14,000

Question 79

A company issued a bond with a stated rate of interest that is less than the effective interest rate on the date of issuance. The bond was issued on one of the interest payment dates. What should the company report on the first interest payment date?

An interest expense that is less than the cash payment made to bondholders

A debit to the unamortized bond premium

An interest expense that is greater than the cash payment made to bondholders

A debit to the unamortized bond discount

Answer 79

An interest expense that is greater than the cash payment made to bondholders

Since the effective rate is higher than the coupon rate, the effective interest will be greater than the cash paid to the bondholders.

If the stated rate of interest on a bond is less than the effective rate, the bond will sell at a discount.

Question 80

A corporation recently issued $4 million of 10-year, 3% bonds at 101. There were 200,000 detachable stock warrants included as part of the sale. Each warrant allows the bondholder to purchase one share of no-par common stock for $12 per share. On the date of issuance, the stock warrants had a fair value of $1 per warrant. By what amount did the corporation’s long-term debt increase as a result of this issuance?

$3,840,000

$4,000,000

$4,040,000

$4,200,000

Answer 80

$3,840,000

Corporations sometimes issue certificates with bonds, known as stock warrants, that give the holder of the warrant the right to purchase a specified number of shares of stock at a specified price within a specified time period. Stock warrants are included in the definition of equity securities and classified as shareholders’ equity on the balance sheet. Their fair value must be computed at the time that they are issued and separated from the value of the bond, which is classified as debt rather than equity.

In this example, the fair value of the warrants on issuance is known, $200,000 ($1 fair value per warrant × 200,000 warrants). This $200,000 would increase stockholders’ equity. Total cash received for the bonds with warrants was $4,040,000 ($4,000,000 × 1.01). The remaining $3,840,000 ($4,040,000 – $200,000) is allocated to the bonds payable account (long-term debt).

Question 81

Stock Rights

Corporations sometimes issue certificates, known as ____, that give the holder of the warrant the right to purchase a specified number of shares of stock at a specified price within a specified time period. In some cases, these warrants are issued to existing stockholders as a means of either:

1. Complying with any ____associated with that class of stock
2. Aiding the sale of additional shares of____

Answer 81

warrants

preemptive right

stock

Question 82

Which of the following financial instruments must be presented in the balance sheet as liabilities?

Obligations to repurchase the issuer’s equity shares by transferring assets

All of these financial instruments must be presented as liabilities on the balance sheet.

Mandatorily redeemable financial instruments

Certain obligations to issue a variable number of shares

Answer 82

All of these financial instruments must be presented as liabilities on the balance sheet.

FASB ASC 480-10-10 addresses the classification of the following three classes of freestanding financial instruments:

1. Mandatorily redeemable financial instruments
2. Obligations to repurchase the issuer’s equity shares by transferring assets
3. Certain obligations to issue a variable number of shares

These three classes of financial instruments must be presented in the balance sheet as liabilities. They may not be presented between the liabilities section and the equity section.

Question 83

On July 31, 2015, Dome Co. issued $1,000,000 of 10%, 15-year bonds at par and used a portion of the proceeds to call its 600 outstanding 11%, $1,000 face value bonds, due on July 31, 2024, at 102. On that date, unamortized bond premium relating to the 11% bonds was $65,000. In its 2015 income statement, what amount should Dome report as gain or loss, before income taxes, from retirement of bonds?

$(65,000) loss

$0

$53,000 gain

$(77,000) loss

Answer 83

$53,000 gain

Question 84

An entity must classify as a liability a financial instrument, other than an outstanding share, that, at inception:

requires or may require the issuer to settle the obligation by transferring assets.

either embodies an obligation to repurchase the issuer’s equity shares or requires or may require the issuer to settle the obligation by transferring assets.

both embodies an obligation to repurchase the issuer’s equity shares and requires or may require the issuer to settle the obligation by transferring assets.

embodies an obligation to repurchase the issuer’s equity shares.

Answer 84

both embodies an obligation to repurchase the issuer’s equity shares and requires or may require the issuer to settle the obligation by transferring assets.

An entity must classify as a liability a financial instrument, other than an outstanding share, that, at inception (FASB ASC 480-10-25-8):

1. embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation and
2. requires or may require the issuer to settle the obligation by transferring assets.

Question 85

An entity must classify as a liability a financial instrument, other than an outstanding share, that, at inception (FASB ASC 480-10-25-8):

1. embodies an obligation to ___the issuer’s equity shares, or is indexed to such an obligation and
   
   1. requires or may require the issuer to settle the obligation by __assets.

Answer 85

repurchase

transferring

Question 86

Answer 86

$1,300,000

Term bonds are bonds which are scheduled to be outstanding for a fixed period of time, or term.

Blue Corp.’s term bonds include:
9-3/4% registered debentures $ 700,000
9-1/2% collateral trust bonds 600,000
Total term bond $1,300,000

Note: The 10% subordinated debentures are serial bonds, bonds which mature at regular intervals over a specified time period.

Question 87

Answer 87

$62,500

Since one of the 10 payments had been collected on December 31, 20X1, the carrying amount of the note receivable would be the present value of a nine year annuity of $10,000 discounted at 8%.
Carrying value of note receivable
= Annual payment x Present value of ordinary annuity factor
= $10,000 x 6.2469
= $62,469 or $62,500 rounded

Question 88

Cottonwood Corporation reported the following liabilities at December 31, 20X6:

1. Accounts payable $ 57,000
2. Payroll liabilities 32,500
3. Serial bonds payable (current portion $75,000) 639,000
4. Note payable, matures November 30, 20X7 211,000
5. Mortgage payable (current portion $17,400) 353,000

The bonds payable of $639,000 was in violation of the covenants specified in the bond contract. The creditor had not waived the rights for the bonds. What amount should Cottonwood report as current liabilities at December 31, 20X6?

$956,900

$939,500

$375,500

$392,900

Answer 88

$956,900

Current liabilities represent obligations whose liquidation is expected to require the use of current assets or the creation of other current liabilities.

Current liabilities also include long-term obligations that are or will be callable by the creditor because the debtor has violated a covenant in the debt agreement.

The note payable matures in 11 months from the balance sheet date and is a current liability. Also, since a portion of the mortgage payable (the current portion) will be paid this year and therefore require the use of current assets, it is also included in current liabilities.

The computation is $57,000 + $32,500 + $639,000 + $211,000 + $17,400 = $956,900.

Question 89

Album Co. issued 10-year, $200,000 debenture bonds on January 2. The bonds pay interest semiannually. Album uses the effective interest method to amortize bond premiums and discounts. The carrying value of the bonds on January 2 was $185,953. A journal entry was recorded for the first interest payment on June 30, debiting interest expense for $13,016 and crediting cash for $12,000. What is the effective interest rate for the debenture bonds?

7%

6%

14%

12%

Answer 89

Effective interest = Carrying value of the bonds × Effective interest rate × Time period

In this case:

$13,016 = $185,953 × Unknown effective interest rate × 1/2 year

Effective interest rate = ($13,016 ÷ $185,953) × 2 = 14%

Question 90

The debt-to-equity ratio is computed by which of the following formulas?

Total liabilities ÷ (Total liabilities + Total stockholder’s equity)

Common stockholders’ equity ÷ (Total liabilities + Total stockholder’s equity)

Common stockholders’ equity ÷ Total liabilities

Total liabilities ÷ Total stockholder’s equity

Answer 90

Total liabilities ÷ Total stockholder’s equity

The debt-to-equity ratio is a leverage ratio that measures the relationships between total debt (current and long-term liabilities) to total equity. In other words, debt is expressed as a percentage of total equity or capitalization. When reviewing the results of this ratio, it is important to carefully identify how the two elements have been defined.

Debt can be defined as total debt, only long-term debt, total debt excluding deferred income taxes, total debt including redeemable preferred stock, etc.

Equity can be defined as total capital including or excluding preferred stock and total debt, stockholders’ equity, etc.

The computation is Debt ÷ Equity. Obviously, different definitions of debt and equity will change the results of this computation.

Question 91

The market price of a bond issued at a premium is equal to the present value of its principal amount:

only, at the stated interest rate.

only, at the market (effective) interest rate.

and the present value of all future interest payments, at the market (effective) interest rate.

and the present value of all future interest payments, at the stated interest rate.

Answer 91

and the present value of all future interest payments, at the market (effective) interest rate.

FASB ASC 835-30-25-10 requires all long-term receivables and payables to be recorded at present value. Additionally, the present value of all the cash flows (principal and interest) at the beginning of any bond arrangement represents the amount of cash the issuer will receive from the purchaser (i.e., the market price of the bond).

The stated rate of interest is used to determine the amount and timing of the cash flows for interest. The market rate is the true rate of interest in the arrangement and is used to determine the present value of all the cash flows.

Question 92

On December 31, Year 1, Taylor, Inc., signed a binding agreement with a bank for the refinancing of an existing note payable scheduled to mature in February of Year 2. The terms of the refinancing included extending the maturity date of the note by three years. On January 15, Year 2, the note was refinanced. How should Taylor report the note payable in its December 31, Year 1, balance sheet (statement of financial position)?

A long-term note receivable

A current liability

A long-term liability

A current note receivable

Answer 92

A long-term liability

.

A long-term liability is a liability scheduled to mature beyond one year.

As of the end of the reporting period, it is clear that Taylor intends to refinance the debt and that it is scheduled to mature in three years. Consequently, it should be classified as a long-term liability.

Question 93

What type of bonds mature in installments?

Debenture

Term

Serial

Variable rate

Answer 93

Serial

Debenture bonds do not have a security interest in specific property. Variable rate debt has no fixed stated rate. Term bonds all mature together after a fixed term, but serial bonds mature in installments.

Question 94

On June 30, Huff Corp. issued at 99, 1,000 of its 8%, $1,000 bonds. The bonds were issued through an underwriter to whom Huff paid bond issue costs of $35,000. On June 30, Huff should report the bond liability at:

$990,000.

$1,025,000.

$1,000,000.

$955,000.

Answer 94

$955,000.

Accounting Standards Update (ASU) 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts; the recognition and measurement guidance for debt issuance costs were not affected by the amendments. Amortization of debt issuance costs also shall be reported as interest expense; issue costs will no longer be reported in the balance sheet as deferred charges.

The carrying value of the debt, initially, the bond liability, is $990,000, computed as the number of bonds multiplied by the face amount per bond, multiplied by the issue percentage, reduced by the bond issue costs of $35,000:

1. 1,000 bonds × $1,000 face × 0.99 = $990,000
2. $990,000 − $35,000 = $955,000

Question 95

On June 1, Greendale Corp. issued $700,000, five-year bonds at 8%, with interest payable annually on May 31. The bonds sold for $728,700 when the market rate of interest was 7%. Greendale uses the effective interest method for amortizing premiums on bonds payable. What is the balance of the premiums on bonds payable account immediately following the first interest payment?

$34,440

$23,709

$33,691

$22,960

Answer 95

$23,709

301731

Question 96

On December 31, 20X1, Roth Co. issued a $10,000 face value note payable to Wake Co. in exchange for services rendered to Roth. The note, made at usual trade terms, is due in 9 months and bears interest, payable at maturity, at the annual rate of 3%. The market interest rate is 8%. The compound interest factor of $1 due in 9 months at 8% is .944. At what amount should the note payable be reported in Roth’s December 31, 20X1, balance sheet?

$9,440

$9,652

$10,000

$10,300

Answer 96

$10,000

The Roth Co. note is due in 9 months. FASB ASC 835-30 (Interest on Receivables and Payables) does not require any special treatment for notes maturing in less than one year. Wake Co. should report the Roth Co. note at its face amount, $10,000.

Question 97

Pane Co. had the following borrowings on its books at the end of the current year:

1. $100,000, 12% interest rate, borrowed five years ago on September 30; interest payable March 31 and September 30
2. $75,000, 10% interest rate, borrowed two years ago on July 1; interest paid April 1, July 1, October 1, and January 1
3. $200,000, noninterest-bearing note, borrowed July 1 of current year, due January 2 of next year; proceeds $178,000

What amount should Pane report as interest payable in its December 31 balance sheet?

$4,875

$26,875

$6,750

$41,500

Answer 97

$4,875………..301804

Question 98

E & S Partnership purchased land for $500,000 on May 1, 20X1, paying $100,000 cash and giving a $400,000 note payable to Big State Bank. E & S made three annual payments on the note totaling $179,000, which included interest of $89,000. E & S then defaulted on the note. Title to the land was transferred by E & S to Big State, which canceled the note, releasing the partnership from further liability. At the time of the default, the fair value of the land approximated the note balance. In E & S’s 20X4 income statement, what should the amount of the loss be?

$190,000

$221,000

$279,000

$100,000

Answer 98

$190,000

Because the fair value of the land approximated the balance due on the note, neither the debtor (E & S) nor the creditor (Big State) records a gain or loss on the settlement of the debt.

E & S, however, must record a gain or loss on the disposal of an asset (the land). Since the fair value of the land approximated the balance due on the note, the fair value must have declined from the purchase price (which is also the carrying value since land is not depreciable); therefore, the loss must be in the amount already paid on the purchase, or, $190,000 (the $100,000 payment and the $90,000 payments made on principal of the note (total payments - interest = $179,000 - $89,000 = $90,000)).

Question 99

The following information pertains to the transfer of real estate pursuant to a troubled debt restructuring by Knob Co. to Mene Corp. in full liquidation of Knob’s liability to Mene:

Carrying amount of liability liquidated $150,000
Carry amt of real estate transf 100,000
Fair value of real estate transferred 90,000

What amount should Knob report as a pretax gain (loss) on restructuring of payables?

$0

$(10,000)

$60,000

$50,000

Answer 99

$60,000

In the case of a transfer of assets to satisfy a debt in a troubled debt restructuring, the debtor shall recognize a gain/loss on the transfer of assets (equal to the difference between the fair value and carrying value of the liability liquidated).

Carrying amount of liability settled $150,000
Less fair value of real estate transferred 90,000
Pretax gain on restructuring of payables $ 60,000